Explain how inflation and deflation complicate the computation of the gross national product.

Gross National Product (GNP) is the total value of all goods and services produced by a country's residents over a specific period, usually a year. Inflation is the rate at which the general level of prices for goods and services is rising, leading to a decrease in the purchasing power of money. Deflation is the opposite of inflation, characterized by a decrease in the general level of prices for goods and services.

Inflation can complicate the computation of GNP because it erodes the value of money over time. When inflation is present, the value of the currency declines, and the same amount of money buys fewer goods and services. To accurately measure GNP in the presence of inflation, the nominal GNP (measured at current market prices) must be adjusted for inflation using a price index such as the Consumer Price Index (CPI) or GDP deflator. This adjusted measurement is called the real GNP, which accurately reflects the changes in the production of goods and services, independent of any changes in the price level.

Like inflation, deflation can also complicate the computation of GNP. Deflation leads to an increase in the value of money, and the same amount of money buys more goods and services than before. In order to assess the real performance of an economy in a deflationary environment, one must also adjust the nominal GNP for the change in prices. The process is similar to that used in the case of inflation; the real GNP is calculated by removing the effects of price changes using a relevant price index such as the CPI or GDP deflator.

Failing to account for inflation or deflation while calculating GNP can lead to misinterpretations of a country's economic performance. For example, if nominal GNP is increasing but the inflation rate is also high, the increase in nominal GNP may mistakenly be seen as economic growth, when in reality, it is largely due to the rise in prices. Conversely, if nominal GNP is decreasing and the economy is experiencing deflation, the decline in nominal GNP may be misinterpreted as economic contraction, when the actual production of goods and services may not have decreased significantly. In conclusion, inflation and deflation complicate the computation of GNP by distorting the value of money and the prices of goods and services. To accurately measure a country's economic performance, it is crucial to adjust the nominal GNP for changes in price levels using a relevant price index and report the real GNP. This helps to avoid erroneous conclusions regarding economic growth or decline.